Will Tonlin Department StoreLtd (TPE:2910) Multiply In Value Going Forward?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Tonlin Department StoreLtd (TPE:2910), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Tonlin Department StoreLtd:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.032 = NT$153m ÷ (NT$6.2b - NT$1.5b) (Based on the trailing twelve months to September 2020).

So, Tonlin Department StoreLtd has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 5.1%.

View our latest analysis for Tonlin Department StoreLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Tonlin Department StoreLtd's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Tonlin Department StoreLtd Tell Us?

There are better returns on capital out there than what we're seeing at Tonlin Department StoreLtd. The company has consistently earned 3.2% for the last five years, and the capital employed within the business has risen 36% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Tonlin Department StoreLtd has done well to reduce current liabilities to 24% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

What We Can Learn From Tonlin Department StoreLtd's ROCE

Long story short, while Tonlin Department StoreLtd has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 66% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know more about Tonlin Department StoreLtd, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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